The Icelandic Economic Miracle Hannes H Gissurarson Professor of Politics University of Iceland

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Text of The Icelandic Economic Miracle Hannes H Gissurarson Professor of Politics University of Iceland

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  • The Icelandic Economic Miracle Hannes H Gissurarson Professor of Politics University of Iceland
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  • Adam Smith: No Miracles Wealth of Nations: Division of labour and free trade Limited government Ones profit not anothers loss Coordination without commands
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  • Historical Highlights Settled 874-930 Commonwealth 930-1262 Under the Norwegian, later Danish, king Home rule 1904 Sovereignty, in a personal union with Denmark, 1918 Republic, 1944
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  • Main Facts Population 307,672 (1/12/ 2006) 103,000 sq. km (same as East Germany) GDP per capita (PPP) 2004: $33,641 GDP per capita (PPP) 2005: $36,363 Main exports: fish, aluminium, financial services
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  • 874-1874, One of the Poorest Could only sustain 50,000 people Famines until 19th century; then emigration to America Poverty unfairly blamed on Danish colonial rule Agriculture held down fisheries; ruling farmers hindered development of resources
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  • 1874-1940, Less than Denmark Source: Hagskinna (Gudmundur Jonsson)
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  • 1940-1991, False Prosperity Profits, both in hot and cold war Wider resource base by four extensions of EEZ, finally to 200 miles in 1975 Overfishing, first of herring, then of cod Some natural economic growth Signs of economic decline in late 1980s Turning point in 1991
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  • The Icelandic Model 1991- Cutting subsidies Stabilising the economy Liberalising markets Privatising Cutting taxes Developing property rights to natural resources Strengthening pension funds
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  • Monetary Stability Source: Icelandic Bureau of Statistics
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  • From Deficits to Surpluses Source: Icelandic Ministry of Finance
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  • Fiscal Responsibility Source: Icelandic Ministry of Finance
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  • No Unemployment Source: Icelandic Ministry of Finance
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  • Pension Fund Reforms Tax-financed public pension fund since 1930s Compulsory occupational pension funds since 1960s Pay-as-you-go funds replaced by accumulation funds Voluntary private pension schemes (supplementary) Pension reforms in 1998
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  • Pension Funds: Large Assets 2005, total assets of occupational pension funds 1,200 billions ISK, 120% of GDP 2004, private pension schemes savings 13 billions ISK 2004, public pension fund paid out 19.3 billions ISK; occupational pension funds 20.4 billions (to 90% of pensioneers) 2004, average individual pension about $2,000 per month (154,000 ISK)
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  • Pension Fund Assets Source: OECD (Pension Markets in Focus, 2006)
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  • Privatisation Travel bureau, printing house, publishing house, fish processing plant, etc. 1992-2005 Government investment funds 1999, later merged with others to form Glitnir Bank Landsbanki 2002 Bunadarbanki 2002, later merged with others to form Kaupthing Bank Icelandic Telephone 2005 Total revenue from privatisation $2 billions
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  • Tax Cuts Corporate incomes tax from 45% to 18% Individual incomes tax from 30.41% to 22.75% Turnover tax abolished High-incomes incomes tax abolished Net wealth tax abolished Death duties (estates tax) reduced
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  • Corporate Incomes Tax Cut Source: Icelandic Ministry of Finance
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  • Example of Laffer Curve?
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  • 1992-2008: Share of GDP 32% Source: Icelandic Ministry of Finance
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  • Development of ITQ System Open access to fishing grounds led to overfishing 1975, individual quotas (% of total allowable catch) in herring fishery 1984, individual quotas in cod and other demersal fisheries Gradually, quotas became transferable 1990, ITQ system made universal
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  • Overfishing with Open Access Source: H. S. Gordon, Journal of Political Economy, 1954
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  • Icelandic Debate on Fisheries How to reduce boats from 16 to 8? (a) Pigovian economists: government auction of ITQs (b) Property rights theorists: ITQs permanent, universal and freely transferable, initial allocation on basis on catch history (b) Pareto-optimal change: No-one worse off
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  • Efficient Fisheries Initial allocation on basis of catch history meant owners of fishing capital bought out, not driven out Much resentment; compromise in 2002: nominal resource use fee Total value of quotas about 350 billions ISK (appr. $5 billions) Reduction of fishing effort; stronger and fewer fishing firms
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  • Fishing Firms Profitable Source: Icelandic Association of Fishing Vessel Owners
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  • Strong Financial Sector Since 2002, total turnover of banks increased more than 7-fold 2005, total assets of banks 7,700 billions ISK, 7-fold GDP 2005, net worth of banks 530 billions ISK, about 50% of GDP; in 2000, net worth 7% of GDP More than 50% of total income from abroad
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  • Change of Icelandic Economy Source: Icelandic Bureau of Statistics
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  • Whence Came the Money? First: ITQ system Second: Capital gains from privatisation Hernando de Soto: Previously dead capital became registered, transferable, and usable as collateral Third: Pension funds
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  • The New Vikings: Ventures Brewery in Russia, sold to Heineken Arcadia, sold to investors Actavis investments in Bulgaria and Malta Bakkavors acquisition of Katsouris Fresh Food in United Kingdom Kaupthings acquisition of Danish and Dutch banks Novator investments in Eastern Europe
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  • Economic Growth in Iceland Source: Icelandic Bureau of Statistics
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  • 10 Richest Countries, 2006 Source: World Fact Book
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  • All Incomes Groups Benefit Average annual increase in purchasing power after tax 1995-2004 4.8% Annual increase of lowest 10% group 2.7% OECD average of lowest 10% group 1.8% (1996-2000)
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  • 1996-2000: Lowest 10% Income Source: Icelandic Bureau of Statistics (Stefan Olafsson); OECD (Michael Frster)
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  • Risk of Poverty 2nd Lowest Source: Eurostat and Icelandic Bureau of Statistics
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  • Income Distribution in Europe Source: Eurostat and Icelandic Bureau of Statistics
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  • Rawls: Worst-Off Best-Off Which system would we choose, if we did not know our own position in it? Where worst-off best off (maximin rule) Chosen: neither the Nordic nor the Anglo-Saxon model, but the Icelandic?
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  • The Way Ahead Cutting corporate incomes tax to 10% Cutting personal incomes tax Cutting VAT Cutting import charges Continuing privatising In place of enforced equality, creating opportunities

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